I was in London on June 23, the
day the British voted to leave the European Union, when my taxi driver confessed:
“I don’t know why I voted to Leave, but I wanted to vote for my country.” His
remarks summed up the mood behind the “Brexit” vote that seems to have caught markets,
politicians, business leaders and even much of the public so off guard. In just
the past few days, we have seen a dizzying array of dire reactions in the U.K.,
Europe and across the globe, including dramatic plunge of the pound
sterling and trillions of dollars in global stock market losses.
This short-term disruption is the
natural effect of fear of the unknown. The market chaos that we are witnessing is
due to people not knowing what leaving the EU will mean. The day after the
vote, CNN reported that the most Googled search in the UK was- “What is the EU?”
Visibility is low, and it is difficult to discern the guideposts, much less the
horizon. While this situation is understandable, we at Avison Young cannot
emphasize too strongly that no one knows how the U.K. vote to Leave will play
out. A complex series of political and economic negotiations will need to be
navigated over a long period of time before clarity is restored.
Yet, disruption is always a time
of opportunity as well as a time of risk. Smart money will pause, assess – and
then formulate new strategies. Brexit is not the death of the U.K. or Europe,
and it is not the death of real estate investment, either. Our industry will
bounce along as negotiations and rhetoric between the U.K. and the EU start,
but global commerce is alive and well – and the U.K. is a big part of it. We
may or may not be in the midst of a long-term trend, but business does not cease
for long periods.
From a commercial real estate
perspective, in the short term, we expect the bid-ask spread to increase as
buyers and sellers jockey for position with very different views on value. This
trend will lead to a slower investment pace and lower volume of transactions –
although we would not be surprised to see a few large, bold transactions from
smart-money investors. Similarly, for leasing, most multinationals will pause
to assess the situation and chart a new course. We anticipate a slower pace and
lower volumes among occupiers as well as investors in the short term.
The U.S. dollar is the big
beneficiary and, thus, makes North American investment in the U.K. and
continental Europe enticing as events stabilize. Europe is effectively on sale
to North American investors due to currency losses. Previously unavailable opportunities
may suddenly open up.
North
America will continue to represent the best port in the storm. Core markets in the
U.S. and Canada, in particular, become safe havens for commercial real estate investors,
and New York, Toronto, San Francisco, Vancouver and Los Angeles could be a huge
beneficiaries. The U.S. has
largely been the world's core market over the past 24 to 36 months, with the
most aggressive investors making acquisitions for capital preservation as much
as for yield. The Brexit vote aftershock will amplify that situation, and we
will see more markets and assets that are not traditionally viewed as core – but
increasingly exhibit core characteristics – begin to trade as such. Expect the
research-driven core funds to lead the way followed by separate accounts and
offshore funds. In major markets, smaller assets that have the right
characteristics will see pricing previously reserved for larger properties, due
to lack of investable assets on the market.
The interest-rate
environment, which was beginning to see signs of uptick, will remain stable to
down over the next two years, possibly even the next three to five years – another
ultimately positive factor for real estate investment. Brexit has clearly impacted
interest rates and may have dealt a death blow to central banks interested in
raising rates any time soon. Real estate as an alternate investment just became
that much stronger.
Some
short-term trends may promote investment opportunities; however, over the longer
term, it will be wise to take the time to assess the strategic factors in play.
It is simply not known yet how tariffs, import-export regulations, security
agreements and movement of labor will be affected. The political and legal
decisions that will shape the new relationship between the U.K. and Europe are,
at this stage, opaque.
Europe’s broader political landscape will make exit
negotiations quite challenging. Upcoming elections in Spain, France and Germany
are bound to exert pressure on European negotiators, and some member countries will
be in a hurry to be, or at least look, punitive. It is not unthinkable that
Russia might make another move to test the nerve of the West.
On the home front, the U.K. has more than its
fair share of homegrown problems. Scottish and Northern Irish voters, who strongly voted
to Remain, are now rethinking their own alignment strategies. While the British
economy has breadth and depth, according to The
Economist, Britain sends more than 40% of its exports to Europe, while the EU sends only 7% of its exports to the UK. Accordingly, Britain’s massive trade
imbalance leaves it highly vulnerable to trade disputes.
Our advice to clients is to
proceed with caution. History points to downward trends in the short term and a
recovery in the medium term, but anyone who claims to know the details or the
exact outcome over the long term is foolish. Brexit will play out in real time
before us. The ending to this story is unknown.
With that said – although the
emotions of this vote are high, the decline in markets around the world steep
and the landscape one of uncertainty – capital flows have always found
investable assets, and those who take advantage of the downturn will profit. Commercial
real estate investment fundamentals remain very strong. At Avison Young, we
encourage our clients to assess their situations carefully and develop a plan.
Take time to pause and assess, seek out our experts. One thing is for sure- smart
money has always taken advantage of disruptions in the marketplace.
(Mark Rose is the Chair and CEO of Avison Young.)
